Unlock The Power Of Lowrisk Investing A Simple Guide To Treasury Bills

How T-bills actually work in practice

Most people think Treasury bills are just savings accounts with extra steps. They're not. They're discount instruments — you buy them for less than face value and get the full amount back at maturity. The difference is your interest. That's it. No coupons, no semi-annual payments, just the spread between what you paid and what you get back. I spent three years managing a small portfolio before I really understood the mechanics. The first time I bought a T-bill, I expected to see interest payments show up in my account like a bond or a CD. Nothing happened until maturity. I thought something was broken. It wasn't. The yield was just baked into the discount.

Unlock The Power Of Lowrisk Investing A Simple Guide To Treasury Bills

You can buy T-bills directly from the Treasury through TreasuryDirect.gov, or through most major brokerages like Fidelity, Vanguard, Charles Schwab, and E*TRADE. The brokerage route is easier for most people. TreasuryDirect has an interface that feels like it was designed in 1998 and never updated. I switched to Fidelity after my second purchase and haven't looked back. Here's the basic process: log into your brokerage account, navigate to the fixed income or bond trading section, search for T-bills, and place an order. You'll see a list of available maturities — 4-week, 8-week, 13-week, 26-week, and 52-week. Each one shows a current yield and a price. You choose the amount you want to invest, and the brokerage handles the rest. The money is locked until maturity. You can sell early on the secondary market, but you might get less than you paid depending on where rates have moved. The yield you see when you place the order is the discount yield, which is different from the bond-equivalent yield. The discount yield uses a 360-day year and annualizes based on face value, not your actual investment. The bond-equivalent yield is more accurate because it uses a 365-day year and compounds semi-annually. For a 13-week T-bill, the difference between the two is roughly 0.02 to 0.05 percent. It doesn't matter much for small amounts. It matters more when you're deploying six figures.

I learned this the hard way during the 2022 rate-hiking cycle. I was comparing a 6-month T-bill at 4.15% discount yield against a money market fund at 4.10%. The T-bill looked better on the surface. But once I converted the discount yield to bond-equivalent yield, the money market fund actually came out slightly ahead after accounting for the T-bill's liquidity premium and the fact that I'd need to roll over every six months while the MMF would auto-reinvest. The lesson: always compare apples to apples using BEY, and factor in the friction of repeated purchases.

When T-bills make sense and when they don't

They make sense if you need cash in six months or less, if you're building a ladder of short-term reserves, or if you want tax-exempt income at the state and local level. T-bill interest is federally taxable but exempt from state and local income taxes. If you live in California or New York, that state tax exemption alone can make a 4% T-bill comparable to a 4.8% municipal bond in some brackets. They don't make sense if you're looking for long-term growth. T-bills are not inflation hedges. During periods of rising inflation, real returns can go negative even when nominal yields look decent. In 2022, the nominal yield on 3-month T-bills peaked around 4.5%, but inflation was running near 9%. Your purchasing power was still shrinking. I held T-bills that year because I needed the capital preservation, but I won't pretend the real return was attractive. There's also a misconception about safety. T-bills are backed by the full faith and credit of the U.S. government. Credit risk is essentially zero. But market risk is real. If you sell before maturity during a period of rising rates, you'll lose money. In March 2023, when the banking crisis hit and the Fed signaled a pause, T-bill prices jumped. If you'd bought at the peak and sold two weeks later, you'd have made a small gain. If you'd bought two weeks later and sold the next month when the Fed restarted hiking, you'd have taken a loss. Hold to maturity and this risk disappears. Miss the timing and it bites you.

One practical detail people overlook: the minimum purchase. TreasuryDirect allows purchases as low as $100 in $1 increments. Most brokerages set their own minimums, usually $100 per bill. If you're building a ladder with multiple maturities across several brokerages, make sure you're not paying trading fees on each one. Fidelity and Schwab offer commission-free T-bill purchases for their own clients. Vanguard charges a small fee per purchase. It adds up fast if you're dollar-cost averaging into ladders. I also ran into an edge case that isn't documented well anywhere: when you buy a T-bill through a brokerage, the settlement happens on the issue date, not the auction date. The Treasury holds auctions weekly for most maturities. If you place your order after the auction has closed, your broker will typically buy the T-bill on the secondary market for you. That means you're paying whatever price the market is offering, which could be higher or lower than the auction price. During the volatility of early 2023, the secondary market price on a 4-week bill was sometimes 0.1% worse than the auction yield. For a $50,000 purchase, that's about $50. Small, but unnecessary if you know how to time it. The workaround is simple: set a calendar reminder for the weekly auction schedule. The Treasury publishes it monthly. For 4-week and 13-week bills, auctions happen every Monday. You place your order through your broker before the auction closes, and you get the auction price. If you miss the window, you're at the mercy of the secondary market until the next auction. I use a simple Google Calendar alert two days before each auction cycle. It takes thirty seconds and has saved me roughly a hundred dollars in slippage over eighteen months.

For people who want to automate this, there isn't a great option yet. TreasuryDirect doesn't support automatic recurring purchases the way a CD ladder does at a bank. Some brokerages let you set up automatic investments, but the timing often misses the auction window. Manual placement during auction weeks is still the most reliable method. It takes maybe five minutes per auction. That's the trade-off: a bit of hands-on management in exchange for the lowest possible cost and maximum transparency.